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Gold is highly overbought and prices to correct soon

Commodities / Gold and Silver 2011 Aug 20, 2011 - 01:16 PM GMT

By: Sam_Chee_Kong


Gold have been experiencing nothing short of a supernova explosion in its prices in recent months. This is due to investors jittery towards the European crisis and stock markets collapse worldwide ala 2008. As a result investors are now looking for a safe haven for their investments and precious metals provide an ideal avenue for them.

The price of gold has rallied since 2001 with price under $265 per ounce. Since then the price of gold has been on a steady rise amid some corrections and consolidations. There are some huge sell off in global stock markets in the past few weeks and this causes some capital flight from stocks to gold. Gold price soared from $1430 in mid june 2011 to $1853 as of yesterday.  As a result gold prices went parabolic and one of the rule of thumb in investing is that “anything goes up parabolic always end up in crashes”.

As of end of last week gold prices soared more than 20% in five weeks and up 26% year to date. These moves in prices are considered gigantic for such a large asset. Technically gold is highly overbought and gold will not be able to sustain massive gains in its prices as seen in recent weeks.

Due to its prices rising too far and too fast, it has attracted much speculators and they are getting too excited and greedy. It will come a time when everybody is “fully invested” and there are no more funds to support the further gain in prices. This will result in a steep correction in prices in the short term and the market is just looking for a catalyst to spark off this sell off.

Another reason for the correction in the price of gold is, according to World Gold Council, so far only about 170,000 metric tons of gold been mined. With gold prices hitting more than $1800 recently, the total value of gold works out to be about $ 9.5 trillion. In comparison, the total US money supply tallied at US 10.2 trillion and all of the Fortune 500 companies only capitalize at US 12.2 trillion. So you see, gold as an asset is almost worth as much as the total US money supply. If you don’t call this a bubble then I don’t know what it is.

So, what would cause a sharp downfall in the price of gold ? The most likely catalyst is the margin hike by CME (Chicago Mercantile Exchange).The Interactive brokers bulletin issued a statement yesterday warning of a possible hike in gold derivative margin. Since last week CME has already imposed a 22% hike in gold margin and will likely to increase the margin again in the next few days.

In other words, the CME will likely do a “silver on gold”. Remember during the month of April 2011, silver has been experiencing one of its best bull run ever. From the year low of about $27 in Jan 2011, it went straight up to $50 in April 2011. From then on, CME increase the trading margin for silver a few times and the result is the price of silver crashed back to $32 in a matter of 2 weeks. 

So, for those who are holding some form of gold derivatives like Gold Savings Account from our local banks like Maybank and Public Bank or have some action in Gold Futures via AUX,  I think its time to take some profits off the table. Parabolic increases in prices always results in steep plunging in prices.

by Sam Chee Kong

    © 2011 Copyright  Sam Chee Kong - All Rights Reserved

    Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

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